Morgan Housel is one of my favorite financial writers. The unique style of The Wall Street Journal and the ex-columnist The Motley Fool, the combination of personal finance and global economic processes, has already written that I have not been able to recommend.
In his book The Psychology of Money, Housel introduces our behavior about money through interesting stories. According to the author, how smart we are and much more about how we behave plays a small role in the proper management of money.
Morgan Housel writes about these patterns of behavior, tips, and psychological tricks.
The essence of the book
- Increase your investment time! Time increases profits and smooths losses.
- Know what game you are playing! Don’t compare yourself to others! Know what’s important to you and plan your financial goals accordingly!
- The most important thing is the savings rate! It doesn’t matter how much you earn or the return on your investment. Wealth can be built without a high income, but not without a high savings rate.
- Freedom makes you happier than money! Use your money to make time for it.
The story of Ronald Read and Richard Fusco
Ronald James Read worked for 25 years at a gas station and then 17 years as a caretaker at a JC Penney. Read was the first in his family to finish high school. He had average jobs with modest earnings, which saved him a lot. And he invested his money in blue-chip stocks.
In his will, Read left $ 2 million for his stepchildren and $ 6 million for the local hospital and library.
Richard Fusco, a former top manager at Merrill Lynch, lived not far from Ronald Read in his eleven-bathroom luxury villa. Fusco graduated from Harvard with a successful career and then retired early to pursue charitable affairs.
Fusco went bankrupt in 2000 and lost almost everything.
There are two possible explanations for the story of Ronald Read and Richard Fuscone:
- Financial results are largely influenced by luck, independent of individual intelligence and effort.
- Financial success is not science-based but a soft skill. How you behave is more important than what you know.
This soft skill is the psychology of money.
But not many of us have this soft skill.
Mostly because we think and are taught about money as if it were a science like physics (described by rules and laws) and not like psychology (dotted with emotions and nuances).
To figure out why people take out an unreasonable amount of credit, it’s not the interest rates that are worth studying, but the history of greed, uncertainty, and optimism.
No one is a fool
It is a challenge for us that no learning or open-mindedness can truly bring back feelings of fear and insecurity.
I can read about what it was like to lose everything during the Great Depression, but I don’t have the same emotional scars as those who have actually experienced the crisis.
Every financial decision a person makes sense to them at that moment.
Americans spend more on lottery tickets than movies, video games, music, sporting events, and books combined.
And who play the lottery?
Mostly the poor.
The lowest-income U.S. households spend an average of $ 412 a year on lottery tickets. Four times more than the highest-income households.
Buyers of $ 400 lottery tickets are the same people they say are unable to set aside $ 400 for unexpected expenses. They’re burning their safety net for something that has a one in a million chance of hitting.
If you imagine yourself in the position of the poorest, you will realize that for those on low incomes, a lottery ticket is a rational decision . .
The lottery ticket is the only chance in their lives to get all the good stuff you take for granted. They pay for a dream that you can’t understand because you’re already living that dream. That’s why the less affluent buy more lottery tickets than you do
Luck and risk
Good luck and risk brothers
The trick to dealing with failure is to plan your financial life so that a bad investment here, a missed financial goal there, can’t force you to your knees so you can play until the odds are favorable for you.
Years ago, Nobel Laureate in Economics Robert Shiller was asked, “What do you want to know about investing that we don’t know now”. “The exact role of luck in successful outcomes.” He replied.
It is never enough
The hardest financial skill to acquire is to be able to stop our targets. But it is also one of the most important.
Social comparison is the biggest problem here. As Nassim Taleb explains:
“The real success is getting out of endless competition to regulate our actions for peace of mind.”
Many things are not worth risking. In such cases, the potential gain does not matter.
Don’t cling too much to anything – fame, performance or anything like that. If one thing has unjustly ruined my reputation, it only disturbs me if I cling to my reputation.
The great lesson of the ice ages is that you don’t need an incalculable amount of power to achieve incredible results.
An ice age begins when summer is not able to warm up enough to melt the snow of the previous winter. The remaining ice makes it easier for snow to accumulate the following winter, allowing even more snow to accumulate the following winter. Eternal snow bounces back more sunlight, resulting in more snow. In a few hundred years, a seasonal snow cover will turn into an all-encompassing layer of continental ice.
If something adds up, even a small starting point can lead to an extraordinary result that refutes the logic.
Becoming Prosperous vs. Stay prosperous
Making money requires risk-taking and optimism. But to keep the money, you need the opposite. It takes humility and fear to keep the money that you can lose just as quickly.
You need to be frugal and accept that you owe some of your results to luck, so you can’t repeat your past successes indefinitely.
This is how you win
After a purchase, they wait a few years for the value of the valuable pieces in the portfolio to increase. The portfolio is not made worthwhile by the sum of the values of all the paintings, but by a few exceptions that become disproportionately valuable.
The Russell 3000 Index has grown seventy-threefold since 1980. This is a spectacular result. A spectacular success. However, 40% of the companies in the fund have virtually failed. However, 7% of the fund’s companies provided extremely high performance that was more than enough to offset the loss.
Research shows a sense of control over life a more reliable predictor of positive well-being than any other objective circumstance in our lives that we take into account.
Psychologists call the phenomenon reactivity.
Jonah Berger, a professor of marketing at the University of Pennsylvania, summarized the reactivity as follows:
“People like to feel like they’re in control – they’re sitting in the driver’s seat. When we try to get them to do something, they feel powerless. Instead of feeling like they made the decision, they feel like we have chosen instead. So they say no or do something else, even if they were originally willing to do the same. ”
The ability to do what you want, then and for as long as you want, has an infinite return.
Man in the car paradox
When you see someone driving a nice car, you rarely think about how cool the dude driving the car is . Instead, you think how cool others would think if I had a car like that too .
They wouldn’t think they were cool.
You don’t think they’re cool either.
Wealth is what you do not see
The property is the unbuilt car. Unbuilt diamonds, unused watches and denied first class airfare. Wealth are financial assets that you have not yet turned into visible things.
Wealth building has little to do with your income or return on investment and has more to do with your savings rate.
Wealth is only the accumulated remnant after you have spent what you have pledged. And since you can build wealth without a high income, but you have no chance to build wealth without a high savings rate, it’s clear which one matters better.
When you define savings as the difference between your ego and your income, you realize why many people with a decent income save so little. An everyday struggle against instincts is to extend your peacock feathers to the outermost borders and keep up with others who do the same.
Only saving for a specific purpose makes sense in a predictable world. But ours is not. Savings cover against the inevitable surprises of life so as not to be surprised at the worst possible moment.
There is a well-documented “bias towards the home”. People invest in companies in the country where they sing while ignoring the other 95% of the planet. It wouldn’t be rational until you consider that we’re giving money to virtually strangers when investing.
If fame helps in the leap of faith necessary to continue to support these strangers, then bias towards home is reasonable.
Daily trading and selection of individual stocks is the most common day trading and choosing individual stocks is not reasonable but both can be reasonable in small amounts if your other more diversified investments are not affected.
Scott Sagan, a professor at Stanford University, once said something that everyone who follows the markets and invests should hang on the wall:
“Things keep happening that have never happened before.”
If you rely too much on your investment history, you will ignore exactly the salient events that matter best. History can be a misleading guide to the future of the economy and the stock market, as it does not take into account the structural changes that are relevant at the moment.
The interesting oddity about the history of investing is that the farther you look, the more likely you are to look into a world that is no longer valid today. Many investors and economists are comforted by the fact that their predictions are supported by data from decades and even centuries. But as economies thrive, recent history is often the best guide for the future because it is more likely to contain important conditions that are relevant to the future.
The correct lesson to be learned from surprises is that the world is full of surprises. It is not as if we should use the surprises of the past to mark the boundaries of the future; we simply have to admit the surprises of the past and that we have no idea what might happen next.
Possibilities of error
Tables are good for telling you whether numbers are coming out or not. However, they can’t model well how you’re going to feel when you’re covering your kids at night and wondering if the investment decisions you made were mistakes that were detrimental to their future.
The difference between technically tolerable and emotionally possible is an overlooked version of the possibility of error.
You can plan for all the risks, except for things that seem too crazy to think about at all. And these crazy things can do the most because they happen more often than you think and you have no plans on how to handle them.
You will change
One of the basic tenets of psychology is that people are bad predictors of their future selves. Imagining a goal is easy and fun (you will be a doctor). A goal-supporting competitive activity, along with the growing stressors of real life, is something completely different (12-hour on-call, lost patient…).
In the U.S., only 27% of university graduates work in positions related to their degree.
The reason people like Ronald Read – the wealthy caretaker we’ve met earlier in the book – and Warren Buffett have been so successful is that they’ve been doing the same thing for decades and letting the interest pay off.
But many of us develop so much over a lifetime that we don’t want to do the same for decades.
Nonetheless, compound interest works best if you leave years to grow, if not decades. This is true not only for savings, but also for careers and relationships.
Perseverance is the key.
Nothing is free
Everything has a price, and the key to a lot of things is just figuring out what that price is and being willing to pay. The problem is that the price of a lot of things isn’t obvious until you experience it first hand. By then, however, you are already paying for it.
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